TheStreet Network: TheStreet | MainStreet | BankingMyWay | RealMoney

Description:

We remain selective on the restaurant sector in 2007, with ongoing challenges from the current/operating environment.Rising corn and feedstock prices along with cyclical changes and food-industry capacity rationalization will likely continue to impact proteins (beef and chicken being primary restaurant inputs), as we look out toward 2008. Many restaurant companies have 2007 contracts at prices below current spot-market levels, but appear to be staring at material "reinvestment risk" as they look out to next year.We received what could be an "early shot across the bow" yesterday as Brinker International (EAT) discussed food-cost pressures in some of its contracts that expire with its coming June fiscal year end.
Given the above-mentioned food-cost pressures as well as labor-costs pressures (from state and likely federal minimum-wage increases), we remain cautious regarding the stocks, particularly casual-dining names, many of which continue to have negative same-store sales.The quick-service restaurants sector appears to be better positioned, given positive sales trends and franchise business models, which provide some degree of inflationary protection. Price increases are one way to help offset food costs, but the current casual-dining sales environment makes this lever harder to pull.
Banc of America Securities

Get stock quotes and business news on TheStreet